Backwardation is a market condition where the current price, or spot price, of an underlying asset is higher than prices trading in the futures market. It occurs when the difference between the forward price and the spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase. Backwardation can occur as a result of higher demand for an asset currently than the contracts maturing in the coming months through the futures market.

Key features of backwardation include:

• Downward sloping curve: Backwardation creates a downward sloping curve of the commodity futures price over time, where the spot price is higher than the upcoming futures prices.

• Contango: The opposite of backwardation is contango, where the futures contract price is higher than the expected price at some future expiration.

• Physical delivery: Futures forward curve may become backwardated in physically-delivered contracts because there may be a benefit to owning the physical material, such as keeping a production process running.

Backwardation is a condition of commodities and futures markets, and it doesn’t directly affect stocks. However, investors could use the data from these markets to predict the future performance of the stock market. For example, if markets for construction materials like lumber enter into backwardation, it could be a sign that investors expect a slowdown, which could be bad news for construction company stocks.